In our quest to understand trading options for income, we will look at entering monthly trades on a weekly basis: both Strangles and wide Iron Condors on the SPX.
A Strangle is an undefined risk option strategy in which an OTM (out of the money) Put and OTM Call options are sold concurrently, and within the same option chain. It is considered an undefined risk because the max loss cannot be defined (it is uncertain). An Iron Condor is a defined risk option strategy which is comprised of two OTM credit spreads (a Put credit spread, and a Call credit spread). The max loss is known (the width of the spread less the premium received) which makes this a defined risk. The Iron Condor (because its risk is defined) has a higher ROC (return on capital) than the Strangle.
A Tasty Trade listener contributed this study (under Game Changers), using the following test criteria: the SPX test period was 2 years representing 87 trades; each Friday a 1 SD (standard deviation) Strangle was initiated with 35-40 DTE (days till expiration); also, a 100 point wide Iron Condor was initiated at 1 SD (the same short strikes as the Strangle); the trade was exited at expiration (No Management) vs. a loss equal to the premium received (Limited Loss).
The results: for the Strangle, the P&L was positive for both the No Management ($41,059 with a max loss of -$3,847) and Limited Loss ($53,197 with a max loss of -$1,470) exit strategies. BPR (buying power reduction) for the Strangle was $90,000; and the average credit was $11.21.
For the wide Iron Condor, the P&L was positive for both the No Management ($23,428 with a max loss of -$4,215) and Limited Loss ($40,121 with a max loss of -$1,145) exit strategies. BPR (buying power reduction) for the Strangle was $45,410; and the average credit was $9.18.
In conclusion, there are several key points. First, limiting the loss to the premium received improved the P&L for both the Strangle and Iron Condor; this is especially notable for the latter which showed an improvement in the P&L of over 71 percent ($23,428 vs. $40,121).
Second, the 100 point wide Iron Condor had an average credit that was 18 percent lower than the Strangle, resulting in a drop in P&L (for the Limited Loss strategy) of only 14.6 percent ($53,197 vs. $45,410).
And third, the 100 point Iron Condor had a significantly lower max BPR than the Strangle ($45,410 vs. $90,000). This means that approximately twice as many Iron Condors could have been traded for nearly the same capital at risk (around $90,000); thus, the P&L for the Iron Condor would be higher than the Strangle ($80,242 vs. $53,197).
One last thought, the P&L curves for the Limited Loss strategy were far smoother than the No Management strategy, for both the Strangle and Iron Condor.
If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.